That has kept the yield curve, which measures the difference
between short-term rates and long-term rates, relatively flat
even though some expect the Fed to raise rates again later this
year.

According to Citi's Technicals team, led by Tom Fitzpatrick, the
spread between the US two-year yield and the US five-year yield
is going to flatten further, and the current level of about 35
basis points is the "line in the sand."

In other words, the yield curve is about to breach a crucial
support level. That would normally trigger a "WHAT?"

Research from Citi shows that the three most recent breakdowns of
that level produced a move lower to at least 11 basis points. And
the yield curve eventually inverted, though in the case of the
1994 breakdown an inversion didn't occur until the end of 1997.

Citi, however, says this time around is different and the
narrative that a flattening yield curve is a negative for the US
economy is "completely wrong."

That thought process seems to go along with what others in the
industry are saying.

At a round-table discussion in July,
Mohamed El-Erian, Allianz's chief economic adviser, told
reporters: "If we were living in a normal world, that would be a
massive signal of recession, it's so flat, and at rates so low,
that the only conclusion you could normally devise from the yield
curve is that we are on the cusp of a major recession," but
what's pulling down the yield curve, he said, "has less to do
with the US and has more to do with Europe."

Citi does warn, however, that there is a point at which it will
begin to get worried. That is if the curve inverts by about 20
basis points. Then we might have problem, as the instances in
1989, 2000, and 2006 instances were all a harbinger of "bad
things to come."

And while the shape of the yield curve is important, Citi's
Technicals team says what is even more important is the type of
flattening that occurs. Those scenarios include:

Bear flattening, or the yield curve flattening as Treasurys
sell off, causing yields to move higher. This occurrence would
mean the shorter-term yield rises faster than the longer-term
yield. Citi says this would happen if the market felt the Fed was
going to start raising rates again. It believes something like
this could happen in December.

Bull flattening, or the yield curve flattening as Treasurys
catch a bid, causing yields to fall. In this instance, the
longer-term yield would fall faster than shorter-term yield. Citi
believes this is unlikely to happen, however, as it would most
likely occur if the Fed were to launch another round of
quantitative easing or if foreign investors continued to play the
long end as a play on rate differentials.

"Hybrid flattening," or short-term yields rise as long-term
yields lag or even fall. According to Citi, "This is
predominately a demand/supply driven dynamic where increased
demand for value in the long end of the US curve is not matched
by supply."

As for how this eventually plays out, the team thinks this week's
Jackson Hole Symposium could lead the market to believe that
a Fed rate hike won't happen before the end of the year and that
bull flattening will win out in the near-term. But that could
turn into a hybrid flattening before eventually seeing bear
flattening.